Feb 2006 - Chinese Mining Co

The Chinese are coming!

In our last month’s column in Paydirt, we concluded that it was “hence no surprise to see Chinese based companies trawling the world for orebodies that have long-life (ideally 10 to 20 years plus) potential and are prepared to finance their development”.

A few people have commented that they had not realised what kind of growth was taking place in China until they saw last month’s column. After the 2004 China Mining Conference, we thought that say Newmont could wait on the sidelines for say 5 years, and then take over 5 of the top junior gold companies that had done the “hard yards” establishing producing gold mines in China and building relationships.

However, after last years’ 2005 Conference we have concluded that it is just as possible that in now 4 years’ time (still 2009) it could be more of a case of which Chinese company is going to take over Newmont. While this comment may sound fanciful it should be borne in mind, that the Shenhua Coal Company (a major coal company in China, which is probably well known in the coal industry, but appears to be barely known otherwise) was floated on the Hong Kong Stock Exchange raising ~US$5bn and now has a market cap of ~US$20.5bn.

In their presentation on China’s Growing Appetite for Overseas Mining Investments, CIBC World Markets showed that there are currently 5 foreign listed resource companies on the HKSE with an aggregate market cap of US$34bn.There was also apparently a significant growing pipeline of Chinese resource companies that were expected to list outside of China during the coming year initially including Shandong Zhaojin Gold, the Yunnan Metallurgical Group, Yunnan Copper, the China National Coal Group and probably the Jinchuan Nickel Group.

Those 5 leaders were out of a combined group of about 50 foreign and domestic (from a Chinese viewpoint) companies that could list in the coming 12 months, being ~ 15 coal companies, 10 aluminium, 2 nickel, 3 copper, 6 lead/zinc. 5 gold and 6 other. It has also been noticed that China’s fragmented Geology Brigades and Provincial groups were beginning to combine and become stronger.

While a number of analysts in Australia and Canada are familiar with their country’s companies’ exposure to China, the first comprehensive document was released at the 2005 Conference, by Paul Burton in his World Gold report (//worldgold.net). The report contains details of the Foreign Involvement in China’s Gold Mining Industry covering western gold explorers and mining companies in China, including detail on the regulatory process, geology, gold production and 16 listed western gold companies that are active in China.

Most of the major resource companies that presented at the 2005 Conference were trying to form JVs or take equity in mining companies and/or their projects outside of China. Even Chinese Construction Companies such as China Minmetals and Construction was prepared to pay fro constructing an entire project in return for a percentage of the project and were willing to invest in a portion of the JV company too, as illustrated by their complete financing of a US$550m facility in Pakistan that they were now enlarging.

The pure Chinese gold companies were also evolving as in the China National Gold Company (CNGC) stating that although they were the second largest holder in Sino Gold’s Jinfeng, they had 10 gold mines with expanding resources, 23 exploration properties and 14 EL’s under application. However, they were now intending to expand into other metals having made an agreement with the Jianxi Copper Group in September 2005. CNGC also stated that although they preferred to enter into JVs with gold exploration companies outside of China, they would look at other projects too.

China’s Government was also trying to encourage Chinese companies to explore outside of China, stating that if a Chinese Company entered into a JV involving exploration outside of China, that company would receive RMB3m (A$0.5m) as a gift from the Government towards that exploration expense outside of China.

Within the papers presented at the Conference, China’s Minister of Finance stated that companies developing techniques to improve metallurgical recoveries (such as gold) were to have their tax reduced by 10%. Much was made of the Zhaojin’s proprietary hydrometallurgical technique to recover gold from arsenopryritic refractory ores and the latest breakthrough in producing gold from such ores.

It could be seen that some of China’s companies are sizeable in their own right, and that they needed to improve recoveries on their existing orebodies, and find other significant orebodies throughout the world to fuel their planned growth and consumption of metal.

In his book “1421 – The Year China Discovered the World”, Gavin Menzies showed that China had a vision of establish trading relationships throughout the world using sea transport to source raw materials and trade goods, but were unable to follow through on the potential, due to changing internal politics. Now, almost 600 years’ later, that vision appears to be capable of becoming a reality.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and with his associates, holds interests in some of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.